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A better question might be "Is Homo Economicus a Strawman?" To which the answer is: yes, it is. Classical economics does not actually assert that individual hu

by glenra 12y ago

A better question might be "Is Homo Economicus a Strawman?" To which the answer is: yes, it is. Classical economics does not actually assert that individual humans behave in a purely rational and fully-informed manner. A more accurate premise is that groups of humans tend on average to act at least somewhat as if they were rationally well-informed. We have tools to determine what "rational" behavior might look like and that turns out to have predictive power as applied to human behavior because responding appropriately to incentives is one of the inputs that (in some contexts) shape how people act. This idea that economists are stupidly assuming all people are rational is a myth. People who want to attack "neoclassical economics" should find some other pretext for doing so. As an entirely separate matter, economists all the way back to Adam Smith have known that humans have "fellow feeling" - how other people feel is one input to our own utility functions. The idea suggested in OP that rational behavior must be entirely greedy with no regard for others is also not an inherent part of classical economics. If that premise is used in some strategy calculation, it's rebuttable. To say "people aren't perfectly greedy, so economics is broken" is a bit like assuming in a physics model that bee wings don't flex, proving they can't fly given that assumption and thereby concluding not that the assumption turned out to be inaccurate in this context but rather that physics itself is broken.

ddebernardy 12y ago
> A better question might be "Is Homo Economicus a Strawman?" > To which the answer is: yes, it is. Classical economics does not actually assert that individual humans behave in a purely rational and fully-informed manner. (Actually, classical economics does, in the sense that markets follow a price-demand curve rather than a wiggle as seen experimentally.) Worst yet, though: it's sheer lunacy. In the words of Steve Keen: > Consider, for example, your regular visit to a supermarket. The typical supermarket has between 10,000 and 50,000 items, but let’s segment them into just 100 different groups. How many different shopping trolleys could you fill if you limited your decision to simply whether to buy or not buy one item from each group? You would be able to fill two to the power of one hundred shopping trolleys with different combinations of these goods: that’s 1,267,650,600,228,229,401,496,703,205,376 trolleys in total, or in words over 1,000 million trillion trillion shopping trolleys. If you could work out the utility you gained from each trolley at a rate of 10 trillion trolleys per second, it would take you 100 billion years to locate the optimal one. Obviously you don’t do that when you go shopping. http://rationalwiki.org/wiki/Homo_economicus http://rationalwiki.org/wiki/Homo_economicus
- enoch_r 12y ago
  You're responding to the claim that "classical economics does not actually assert that individual humans behave in a purely rational and fully-informed manner" with an argument that it is impossible for individual humans to behave in a purely rational and fully-informed manner. The only part of your comment that addresses the actual point of disagreement is "(Actually, classical economics does.)" As an aside, Keen's argument is silly. "Rationality" does not require that one must perform a search through every possible permutation of items. One might as well claim that it's impossible to draw a straight line from A to B because there are infinitely many lines from A to B we must search through to find the one we're looking for.
  - TheOtherHobbes 12y ago
    >"Rationality" does not require that one must perform a search through every possible permutation of items. And yet you - or someone, inevitably - is also going to claim that markets are somehow magically "efficient" precisely because they're capable of usefully approximating exactly this kind of optimisation. So which is it? Is "market efficiency" rational or not? As for the original claim - of course it's true. Any sane study of the financial industry should make it obvious that the last people you want to manage anything are those who are motivated primarily by profit - precisely because they inevitably lack empathy and awareness of the social costs of their "rational" decisions.
    - enoch_r 12y ago
      Imagine I argue that, to sort an array of n integers, I must ask myself "is this permutation the sorted array?" for every n! permutations of the integers. Thus it is obvious that humans cannot correctly sort a list of 100 numbers, because even if I could correctly determine whether a given array of 100 numbers is sorted in a single second, it would take 9.3 × 10^157 seconds to sort such an array. This is clearly silly, because I ignore all the other algorithms for sorting such an array--I assume that the only available option is something comically inefficient. In just the same way, when Steve Keen argues that it's impossible that my purchases are rational because choosing rationally requires me to iterate through every possible bundle and select the best one, he is making big assumptions about the type of problem I face, the tools available, and the meaning of rationality. > And yet you - or someone, inevitably - is also going to claim that markets are somehow magically "efficient" precisely because they're capable of usefully approximating exactly this kind of optimisation. As others in this thread have explained, question of whether markets usefully approximate this kind of optimization is distinct from the question of whether individual people perform this optimization successfully. Deviations from efficient markets absolutely occur--the question is what my priors should be. The fact that, for example, it's extremely difficult to reliably identify and profit from financial market inefficiencies suggests that, in fact, markets really do behave astonishingly well, given all that we know about human irrationality.
gordaco 12y ago
I don't think it's a strawman, although I agree that perfect HE don't really exist. It's more like a model, one of the many "spherical cows" in economy (that nevertheless are presented often as undeniable truths). And worse, it's often presented as something positive, something that we should aspire to.
dragonwriter 12y ago
> Classical economics does not actually assert that individual humans behave in a purely rational and fully-informed manner. The rational actor model underpinning classical economic theory (and much other social science theory) does, in fact, assert exactly this. Of course, the rational actor model is widely-understood to be at best a useful approximation to explain both baseline situations and against which real situations can be contrasted to understand how they should vary from the predictions of the model. (OTOH, challenges to the rational actor model as a baseline in economics and other social sciences argue that its not particularly good even at that.) > A more accurate premise is that groups of humans tend on average to act at least somewhat as if they were rationally well-informed. An even more accurate premise is that in some common and important interactions, people tend to be on average be approximately well-informed, and in those interactions, rational choice theory usually seems represents a tolerable approximation of the resulting behavior, suggesting that there are at a minimum important situations in which rationality is a tolerable model for behavior. (Frequently repeated transactions whose utilities and costs are immediate and obvious without obscure, time-delayed, or hard-to-assess utilities or costs resulting from the transaction seem like they should fall into this category, though because utility is not itself directly measurable but is usually inferred from behavior on the assumption that the behavior is rationally motivated, there are some problems with assessing whether this is the case and even whether situations actually fall into this group -- and the inability to measure utility directly risks making rational choice theory something of a just-so story which explains people's behavior as attempting to maximize whatever it is that their behavior actually maximizes. Which ends up not being as much of an explanation as a tautology.)
- glenra 12y ago
  > An even more accurate premise is that in some common and important interactions, people tend to be on average be approximately well-informed I think that's often an unwarranted step to take - I'm MUCH more comfortable with the "act as if" formulation than I would be asserting that people actually are even approximately "well-informed" in most contexts. (Or "rational", for that matter.) To illustrate the problem, consider an industry which is at least somewhat competitive. There is a wide range of available business strategies. Some of these strategies are dumb, but it might not be obvious which. Companies still have to make decisions, so they pick strategies. They might copy a market leader, flip a coin, hire physicists, hire astrologers...but somehow they PICK A BUSINESS STRATEGY. After a few years, the businesses that happened to pick a particularly DUMB strategy go bankrupt; their businesses collapse and get bought; resources get reallocated to better use. After many rounds of this game, a LOT of fragile, unlucky, or dumb business strategies have failed. A few remain that seem to work pretty well, and every company still going is trying to follow one of the more-successful strategies. We now have some idea which strategies work but don't necessarily know WHY. There is institutional wisdom ("we've always done it THIS way") in the winners that they themselves might not understand. In short, the economic environment (given some simple premises) tends to select for being efficient, regardless of whether people understand why what they are doing is efficient. Figuring it all out does probably happen eventually, but the order of cause and effect might be reversed - you try out the strategy, see that it works, scale it up and perhaps THEN figure out why it works. That's why I can describe companies as acting "as if they were rationally well-informed" even though I know that the individuals involved not only do indeed have a bunch of random "behavioralist" biases (the usual criticism) but in many cases they may actually lack conscious deliberate knowledge of why they do what they do.
rayiner 12y ago
> A more accurate premise is that groups of humans tend on average to act at least somewhat as if they were rationally well-informed. That's a wigglier definition of "rational actor" than neoclassical economics actually admits. More precisely, neoclassical economics posits that economic equilibriums are the same as they would be if humans were rational actors. Random irrationality doesn't affect the equilibrium, but systematic irrationality certainly does. Showing that people are systematically irrational about many things, as for example the work of behavioral economists does, certainly is not an unjustified attack on neoclassical economics.
Gimpei 12y ago
Economist here. You're right that "neoclassical economists" or rather macroeconomists assume self-interested behavior on average rather than at an individual level. Furthermore, most recognize that people do not typically behave in the manner posited by macroeconomic theory at an individual level. There's also a mountain of experimental evidence backing this up (see Kahneman for example). However, they don't provide any evidence for why the discrepancy in individual behavior averages out in aggregate, apart from it being "intuitive." Actually, you don't have to be a behavioral economist to find the kind of assumptions needed for macroeconomic modeling pretty dubious. Modern Dynamic Stochastic General Equilibrium models typically take a couple of agents, multiply them by a million and call it consumer demand. The kind of assumptions needed to make this leap have nothing to do with greed and instead concern income distribution and the way it affects demand. It's called the aggregation problem if you're interested. All of which is to say that the economics profession is by no means united on this question. Most microeconomists I know think that microfounded macro models are a joke. For this reason Cal Tech doesn't even teach macro anymore.
- nhaehnle 12y ago
  Most microeconomists I know think that microfounded macro models are a joke. The sad thing about this is that fundamentally, the Lucas critique has a lot of merit. It's just that what macroeconomists used as "microfoundations" is basically a joke because, like you explain, they aren't true microfoundations. Furthermore, even if the kind of aggregation that "microfounded" macroeconomics always does would lead to reliable predictions, there is still the issue that aggregation makes the hidden value judgement that issues of distribution and fairness don't matter. After all, when you aggregate, you only see the averages. Part of the problem is that the important problems of economics - i.e., macro-economic problems - are genuinely hard[1], but public economic discourse acts happens as if much more were known than really is. When it comes to the economy, it's as if we were trying to fly to the moon without knowing about Newton's laws of motion, while at the same time there are powerful and wealthy interests trying to convince everybody that the earth is a disk. [1] They're not hard in the sense that research problems in mathematics are hard; they're hard in the sense that there is a crazy number of hard to measure variables, there's no way to run repeatable experiments, and so on.

by glenra 12y ago

ddebernardy 12y ago

> A better question might be "Is Homo Economicus a Strawman?" > To which the answer is: yes, it is. Classical economics does not actually assert that individual humans behave in a purely rational and fully-informed manner. (Actually, classical economics does, in the sense that markets follow a price-demand curve rather than a wiggle as seen experimentally.) Worst yet, though: it's sheer lunacy. In the words of Steve Keen: > Consider, for example, your regular visit to a supermarket. The typical supermarket has between 10,000 and 50,000 items, but let’s segment them into just 100 different groups. How many different shopping trolleys could you fill if you limited your decision to simply whether to buy or not buy one item from each group? You would be able to fill two to the power of one hundred shopping trolleys with different combinations of these goods: that’s 1,267,650,600,228,229,401,496,703,205,376 trolleys in total, or in words over 1,000 million trillion trillion shopping trolleys. If you could work out the utility you gained from each trolley at a rate of 10 trillion trolleys per second, it would take you 100 billion years to locate the optimal one. Obviously you don’t do that when you go shopping. http://rationalwiki.org/wiki/Homo_economicus http://rationalwiki.org/wiki/Homo_economicus

enoch_r 12y ago
You're responding to the claim that "classical economics does not actually assert that individual humans behave in a purely rational and fully-informed manner" with an argument that it is impossible for individual humans to behave in a purely rational and fully-informed manner. The only part of your comment that addresses the actual point of disagreement is "(Actually, classical economics does.)" As an aside, Keen's argument is silly. "Rationality" does not require that one must perform a search through every possible permutation of items. One might as well claim that it's impossible to draw a straight line from A to B because there are infinitely many lines from A to B we must search through to find the one we're looking for.
- TheOtherHobbes 12y ago
  >"Rationality" does not require that one must perform a search through every possible permutation of items. And yet you - or someone, inevitably - is also going to claim that markets are somehow magically "efficient" precisely because they're capable of usefully approximating exactly this kind of optimisation. So which is it? Is "market efficiency" rational or not? As for the original claim - of course it's true. Any sane study of the financial industry should make it obvious that the last people you want to manage anything are those who are motivated primarily by profit - precisely because they inevitably lack empathy and awareness of the social costs of their "rational" decisions.
  - enoch_r 12y ago
    Imagine I argue that, to sort an array of n integers, I must ask myself "is this permutation the sorted array?" for every n! permutations of the integers. Thus it is obvious that humans cannot correctly sort a list of 100 numbers, because even if I could correctly determine whether a given array of 100 numbers is sorted in a single second, it would take 9.3 × 10^157 seconds to sort such an array. This is clearly silly, because I ignore all the other algorithms for sorting such an array--I assume that the only available option is something comically inefficient. In just the same way, when Steve Keen argues that it's impossible that my purchases are rational because choosing rationally requires me to iterate through every possible bundle and select the best one, he is making big assumptions about the type of problem I face, the tools available, and the meaning of rationality. > And yet you - or someone, inevitably - is also going to claim that markets are somehow magically "efficient" precisely because they're capable of usefully approximating exactly this kind of optimisation. As others in this thread have explained, question of whether markets usefully approximate this kind of optimization is distinct from the question of whether individual people perform this optimization successfully. Deviations from efficient markets absolutely occur--the question is what my priors should be. The fact that, for example, it's extremely difficult to reliably identify and profit from financial market inefficiencies suggests that, in fact, markets really do behave astonishingly well, given all that we know about human irrationality.

gordaco 12y ago

I don't think it's a strawman, although I agree that perfect HE don't really exist. It's more like a model, one of the many "spherical cows" in economy (that nevertheless are presented often as undeniable truths). And worse, it's often presented as something positive, something that we should aspire to.

dragonwriter 12y ago

> Classical economics does not actually assert that individual humans behave in a purely rational and fully-informed manner. The rational actor model underpinning classical economic theory (and much other social science theory) does, in fact, assert exactly this. Of course, the rational actor model is widely-understood to be at best a useful approximation to explain both baseline situations and against which real situations can be contrasted to understand how they should vary from the predictions of the model. (OTOH, challenges to the rational actor model as a baseline in economics and other social sciences argue that its not particularly good even at that.) > A more accurate premise is that groups of humans tend on average to act at least somewhat as if they were rationally well-informed. An even more accurate premise is that in some common and important interactions, people tend to be on average be approximately well-informed, and in those interactions, rational choice theory usually seems represents a tolerable approximation of the resulting behavior, suggesting that there are at a minimum important situations in which rationality is a tolerable model for behavior. (Frequently repeated transactions whose utilities and costs are immediate and obvious without obscure, time-delayed, or hard-to-assess utilities or costs resulting from the transaction seem like they should fall into this category, though because utility is not itself directly measurable but is usually inferred from behavior on the assumption that the behavior is rationally motivated, there are some problems with assessing whether this is the case and even whether situations actually fall into this group -- and the inability to measure utility directly risks making rational choice theory something of a just-so story which explains people's behavior as attempting to maximize whatever it is that their behavior actually maximizes. Which ends up not being as much of an explanation as a tautology.)

glenra 12y ago
> An even more accurate premise is that in some common and important interactions, people tend to be on average be approximately well-informed I think that's often an unwarranted step to take - I'm MUCH more comfortable with the "act as if" formulation than I would be asserting that people actually are even approximately "well-informed" in most contexts. (Or "rational", for that matter.) To illustrate the problem, consider an industry which is at least somewhat competitive. There is a wide range of available business strategies. Some of these strategies are dumb, but it might not be obvious which. Companies still have to make decisions, so they pick strategies. They might copy a market leader, flip a coin, hire physicists, hire astrologers...but somehow they PICK A BUSINESS STRATEGY. After a few years, the businesses that happened to pick a particularly DUMB strategy go bankrupt; their businesses collapse and get bought; resources get reallocated to better use. After many rounds of this game, a LOT of fragile, unlucky, or dumb business strategies have failed. A few remain that seem to work pretty well, and every company still going is trying to follow one of the more-successful strategies. We now have some idea which strategies work but don't necessarily know WHY. There is institutional wisdom ("we've always done it THIS way") in the winners that they themselves might not understand. In short, the economic environment (given some simple premises) tends to select for being efficient, regardless of whether people understand why what they are doing is efficient. Figuring it all out does probably happen eventually, but the order of cause and effect might be reversed - you try out the strategy, see that it works, scale it up and perhaps THEN figure out why it works. That's why I can describe companies as acting "as if they were rationally well-informed" even though I know that the individuals involved not only do indeed have a bunch of random "behavioralist" biases (the usual criticism) but in many cases they may actually lack conscious deliberate knowledge of why they do what they do.

rayiner 12y ago

> A more accurate premise is that groups of humans tend on average to act at least somewhat as if they were rationally well-informed. That's a wigglier definition of "rational actor" than neoclassical economics actually admits. More precisely, neoclassical economics posits that economic equilibriums are the same as they would be if humans were rational actors. Random irrationality doesn't affect the equilibrium, but systematic irrationality certainly does. Showing that people are systematically irrational about many things, as for example the work of behavioral economists does, certainly is not an unjustified attack on neoclassical economics.

Gimpei 12y ago

Economist here. You're right that "neoclassical economists" or rather macroeconomists assume self-interested behavior on average rather than at an individual level. Furthermore, most recognize that people do not typically behave in the manner posited by macroeconomic theory at an individual level. There's also a mountain of experimental evidence backing this up (see Kahneman for example). However, they don't provide any evidence for why the discrepancy in individual behavior averages out in aggregate, apart from it being "intuitive." Actually, you don't have to be a behavioral economist to find the kind of assumptions needed for macroeconomic modeling pretty dubious. Modern Dynamic Stochastic General Equilibrium models typically take a couple of agents, multiply them by a million and call it consumer demand. The kind of assumptions needed to make this leap have nothing to do with greed and instead concern income distribution and the way it affects demand. It's called the aggregation problem if you're interested. All of which is to say that the economics profession is by no means united on this question. Most microeconomists I know think that microfounded macro models are a joke. For this reason Cal Tech doesn't even teach macro anymore.

nhaehnle 12y ago
Most microeconomists I know think that microfounded macro models are a joke. The sad thing about this is that fundamentally, the Lucas critique has a lot of merit. It's just that what macroeconomists used as "microfoundations" is basically a joke because, like you explain, they aren't true microfoundations. Furthermore, even if the kind of aggregation that "microfounded" macroeconomics always does would lead to reliable predictions, there is still the issue that aggregation makes the hidden value judgement that issues of distribution and fairness don't matter. After all, when you aggregate, you only see the averages. Part of the problem is that the important problems of economics - i.e., macro-economic problems - are genuinely hard[1], but public economic discourse acts happens as if much more were known than really is. When it comes to the economy, it's as if we were trying to fly to the moon without knowing about Newton's laws of motion, while at the same time there are powerful and wealthy interests trying to convince everybody that the earth is a disk. [1] They're not hard in the sense that research problems in mathematics are hard; they're hard in the sense that there is a crazy number of hard to measure variables, there's no way to run repeatable experiments, and so on.